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Is Incyte a Buy?

By Maxx Chatsko - Oct 22, 2019 at 8:30AM

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The company is a one-trick pony, but should generate profits for the foreseeable future. Can the pipeline finally come through for investors?

Investors who have owned shares of Incyte (INCY 1.86%) for the last decade are doing remarkably well, sitting on gains of 1,230%. They've captured all of the progress of Jakafi from the time it was an experimental therapy to its $1.58 billion in combined product and royalty revenue last year. But investors who have only been shareholders for the last five years have a decidedly different take on the business. 

Incyte relied on Jakafi for 84% of its total revenue in 2018. That's likely to remain the case following a couple of high-profile stumbles in the pipeline in recent years and lackluster near-term market potential for its remaining late-stage assets. However, the company is likely to generate profits for the foreseeable future and as much as double Jakafi revenue in the next decade. Some of its late-stage assets also have considerable long-term sales potential. Does that make Incyte a buy?

A pipette filling liquids into a 96-well plate.

Image source: Getty Images.

By the numbers

As far as pharma companies go, Incyte is a business of extremes. Jakafi accounted for 86% of total revenue in the first half of 2019. Research and development (R&D) expenses were responsible for 65% of total operating expenses in that period. Each has been a concern of investors. The former due to obvious risks of becoming too dependent on a single revenue stream, which has been highlighted by recent pipeline failures. The latter due to keeping the business from profitability.

Luckily, those concerns may ease up in the near future now that Incyte is comfortably profitable. The business generated $172 million in operating income and $308 million in operating cash flow in the first six months of 2018, well ahead of the year-ago tallies for each metric. In fact, the company has already exceeded full-year 2018 operating income of $129 million and nearly topped the $336 million in cash generated from operations in all of last year.  


First Half 2019

First Half 2018

Change (YOY)

Product revenue

$830 million

$700 million


Royalty revenue

$137 million

$103 million


Milestone revenue

$60 million

$100 million


Total revenue

$1.03 billion

$903 million


Operating expenses

$855 million

$887 million


Operating income

$172 million

$16 million


Operating cash flow

$308 million

$53 million


Data source: SEC filing. YOY = year over year.

Investors might actually be heartened by Incyte's willingness to spend heavily on R&D, even if the end results haven't always been encouraging. It demonstrates that the company is eager to diversify its portfolio and values innovation. That said, the near-term future will continue to rely on Jakafi, but investors looking over the horizon may find reasons for optimism.

A one-trick pony with room to run

Incyte expects to generate at least $1.61 billion in product revenue from Jakafi in 2019. That excludes royalties from sales of the drug in Europe, which are on pace to top $105 million this year. 

But management has told investors that Jakafi could generate at least $2.5 billion in annual revenue within the next decade thanks to recent label expansions. In other words, investors should expect Jakafi to dominate the income statement for the foreseeable future, although healthy profits and high-profile failures from competitors once taking aim at the franchise should lessen anxiety levels

Incyte also boasts six late-stage clinical programs that could expand and diversify revenue in the medium term, including a collaboration with Novartis that could make Jakafi an important graft-versus-host disease (GVHD) treatment. 

Drug Candidate


Next Major Event

Ruxolitinib (Jakafi)

Steroid-refractory GVHD, acute and chronic

Data readout in both indications by end of 2019


Steroid-naive GVHD, acute and chronic

Data readout in acute GVHD by end of 2019 


Cholangiocarcinoma, bladder cancer, other cancers

Cholangiocarcinoma new drug application (NDA) by end of 2019


Follicular, mantle cell, and marginal zone lymphomas

Initial data expected in 2020


Endometrial cancer, anal cancer, and Merkel cell carcinoma

Initial data expected in 2020

Ruxolitinib cream (not Jakafi)

Atopic dermatitis, vitiligo

Phase 3 trial in vitiligo to start by end of 2019

Data source: Incyte investor presentation.

Wall Street analysts aren't too excited about the near-term potential of these programs, but the long-term possibilities stand out. SVB Leerink analyst Andrew Berens thinks the combined potential in GVHD treatments could top $925 million in annual revenue. Meanwhile, Morningstar analyst Karen Andersen estimates that ruxolitinib cream has a 60% probability of generating $1 billion in annual revenue by its 10th year.  

Investors should also keep an eye on pemigatinib. The drug candidate is a selective inhibitor of fibroblast growth factor receptor (FGFR) proteins 1, 2, and 3, which are expressed by various cancer tumors. The market opportunity in cholangiocarcinoma is relatively small, but the drug candidate could find a blockbuster opportunity in bladder cancer. 

Johnson & Johnson recently earned approval for Balversa (erdafinitib), the first FGFR inhibitor to get a regulatory nod, in bladder cancer. Analysts widely expect the drug to generate peak annual sales of over $1 billion. It may be difficult for Incyte to dislodge the incumbent by the time pemigatinib is ready to hit the market (assuming it earns approval around 2023), but Incyte believes it has the most selective FGFR inhibitor in the industry's pipeline. Will that translate into better safety and efficacy?  

A doctor wearing red boxing gloves.

Image source: Getty Images.

This pharma stock is still a little expensive

Investors cannot overlook the progress and potential of Incyte's pipeline. If late-stage programs yield successful results, then the company could be on its way to significant revenue and earnings growth -- within the next 10 years, anyway. Investors with a long-term mindset may not mind being patient, but Jakafi begins to lose patent exclusivity in 2026. Therefore, there's a lot riding on the late-stage pipeline, and right now there's simply not enough information to be overly confident in revenue diversification efforts.

That should factor into any investment decision. After all, shares of Incyte trade at about 6.5 times expected full-year 2019 sales, which is a little more expensive than similarly sized peers. It's possible the market is pricing in the potential for a buyout -- Incyte is always in that discussion, it seems -- but similarly sized peers are more profitable, too. 

In other words, this may come down to your individual preference for risk. Investors with existing positions may feel comfortable holding on, while those looking to begin new positions need to weigh the considerations above. The information gap could begin to close soon given the near-term catalysts from the pipeline. Meanwhile, all investors will learn more when Incyte reports third-quarter 2019 operating results Oct. 29 before the market opens.

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Stocks Mentioned

Incyte Corporation Stock Quote
Incyte Corporation
$76.51 (1.86%) $1.40
Johnson & Johnson Stock Quote
Johnson & Johnson
$179.62 (-0.98%) $-1.78
Novartis AG Stock Quote
Novartis AG
$91.25 (-0.74%) $0.68

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